Your business can improve its spend management to optimize the cost and quality of purchases from the best-qualified vendors and pay them on time to improve supplier relationships. You’ll use software providing efficiency, spend analysis, communications, and insights through automation and real-time analytics.
Company-wide spend management control maximizes the value received for expenditures and reduces cash needs.
Table of Contents
- Definition of Spend Management
- Spend Management Process Broken Down
- Spend Management Best Practices
- Key Focus Areas of Spend Management
- Benefits of Spend Management
- Challenges of Spend Management
- Examples of Spend Management
- Risks of Poor Spend Management
- Spend Management FAQs
- Importance of Spend Management
Definition of Spend Management
Spend management is a comprehensive procurement and strategic sourcing process designed to optimize and reduce costs and vendor risk in purchasing. Spend management analyzes transaction data by the supplier and spend categories, vets suppliers to qualify them, requires competitive bids, negotiates discounts, sets spending limits, manages the supply chain, and analyzes results.
Spend Management Process Broken Down
Seven steps in the spend management process are:
- Identify business expenditures
- Centralize spend data in an automated system
- Verify and clean data for analysis
- Categorize and group spend data
- Analyze spend data
- Devise a spend management strategy
- Forecast spend to improve results
The first five steps are included in the spend analysis process.
Identify business expenditures
Business expenditures include all types of company spending, from G&A costs and R&D to inventory purchases, employee salaries and expenses, outsourced services, marketing investments, and sales commissions.
Centralize spend data in an automated system
Select the most advanced and comprehensive automated software system to handle spend management. The system should have integration with your procurement software. ROI from cost savings will justify the worth of exceptional automated spend management software.
Then centralize expenditures data from all sources in that system.
Verify and clean data for analysis
The data needs to be verified for accuracy after data migration. And the data needs cleaning to eliminate formatting differences and duplications and handle missing data. Data science techniques like machine learning and artificial intelligence require clean data to provide meaningful results for business intelligence.
Categorize and group spend data
Consider the best categories for your business spend data by type of expenditures. And create subtotals by vendor name to further group the data. Once you determine the categories, your spend management system will automate the task.
As part of spend category management, you can use benchmarking to compare your spending to other industry participants.
Analyze spend data
Spend data software will help you identify which categories indicate overspending and offer savings opportunities.
Devise a Spend Management Strategy
Establishing spend management strategies sets a framework for the overall goals of the spend management program within a business. With that strategic overview, company policies, software systems, and processes are selected as tactics to help the company reach its cost reduction and optimal vendor selection and negotiation goals.
Forecast Spend to Improve Results
Using the spend management software to forecast spending by category effectively will help you assess future cash needs and gain insights into cost savings opportunities.
Businesses optimize their spend management when they adopt best practices.
Spend Management Best Practices
Spend management best practices cover the entire source-to-pay (S2P) cycle.
Spend management best practices include:
- Identifying and selecting the right vendors
- Procuring goods and services from qualified vendors for the best price and quality
- Establishing and maintaining good vendor relationships and communication
- Earning volume and early payment discounts to lower business costs and expenses
- Paying vendors timely for those goods and services
- Spend analytics
Although spend management software may include a process for sourcing vendors, Thomasnet.com (a sourcing resource provider) suggests13 Sourcing Tips to Identify New Quality Suppliers that will help you achieve best practices. These sourcing tips go beyond best pricing to ensure that you select the best vendors for procurement.
Spend management platforms, including AP automation software from Tipalti, include supplier portals to increase communication status and provide document repositories for purchase orders, invoices, contracts, and payments.
Your procurement department can negotiate volume discounts with suppliers when negotiating a purchase order or contract.
Your company can earn early payment discounts to save money. The 2/10 net 30 payment term provides a substantial discount (annualized at 36.7%) for paying an invoice within 10 days instead of on its 30-day due date. Companies can sometimes negotiate dynamic discounts with suppliers, where the early payment discount varies by the actual payment date your company uses.
When you pay vendors on time, you’ll improve your supplier relationships and receive future shipments on new orders.
McKinsey & Company describes the complete strategic spend management concept, labeling it spend analytics. In this article titled The role of spend analytics in the next normal, McKinsey describes the vital tasks of procurement in prioritizing spending.
Key Focus Areas of Spend Management
A business practicing intelligent spend management should focus on three keys areas:
- Automation
- Collecting and consolidating spend data
- Forecasting
1. Automation
Automated cloud-based e-procurement systems can improve spend management and efficiently reduce expenditure costs. Electronic procurement systems can include bidding, negotiation, and a document repository for Request for Quotation (RFQ), Request for Proposal (RFP), and contracts.
Invoicing, processing payments, and tracking transactions can be tedious. Whenever possible, automate these processes. Manual labor is slower, more costly, and prone to errors. It makes sense to reserve human capital for activities requiring more complex problem-solving. Employee work redirection can further drive business growth.
2. Collecting and Consolidating Spend Data
Spend analysis, a sub-category of spend management involves collecting, cleaning, and categorizing expenditure data. Companies identify ways to lower costs and streamline the procurement process through spend analysis.
Tightening operations is only possible when data is properly cleaned, collected, and consolidated in one central repository. If possible, using the same spend management software to automate payments and store data makes spend analytics much easier and more accessible.
When analyzing your spend data, consider cloud costs for cloud spend management. And don’t forget about reviewing subscriptions to see which should be canceled.
3. Forecasting
One of the primary goals of spend management is to prepare for the future. It’s important to position a business to operate efficiently and have the flexibility to adapt to changes in supply and demand. Properly organizing spend data and monitoring expenses makes this type of insight possible.
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Benefits of Spend Management
Excellent spend management will provide many benefits as advantages for your business.
Save Money and Improve Cash Flow
Cost-saving opportunities improve your bottom-line profitability and cash flow. Cash available from cost savings can then be funneled into more productive activities like research and development, marketing, and hiring.
Reduce Borrowing Needs
The more internally generated cash (enhanced by spend management effectiveness), the less the company needs to borrow from lenders. With rising interest rates, reducing interest costs is crucial.
Lock in Negotiated Lower Costs over Time
Spend management should contribute to optimal internal cash levels in the business. If product costs increase over time through inflation, negotiated contracts and blanket purchase orders can lock in pricing at a lower level than the company would otherwise incur.
Provide Insight
Organized expense data gives companies the transparency needed to identify and manage bottlenecks. This is especially important for a business looking to scale. Spotting and cutting costs by a few percentage points might not seem like much now, but it could have huge implications as you grow.
Maintain Compliance
Whether it’s tax season, preparing for an audit, or managing supplier contracts, tracking and documenting expenses is critical. Staying organized helps avoid penalties, maximize tax breaks, and keep suppliers happy.
Challenges of Spend Management
Spend management presents some challenges.
Cleaning the Spend Data
A company’s electronic procurement system and ERP may generate data inconsistently formatted or duplicated that needs data cleaning for useful analysis. Missing information also needs to be considered when data is cleansed.
Properly Categorizing Expenditures
Your team needs to plan and refine how the spend data should be categorized to provide useful information and cost savings opportunities. Categorize spend by both spend category and vendor.
Including All Spend Data in an Integrated System
Expenditures should be analyzed from all sources in one centralized database.
Identifying Opportunities for Managing Tail Spend
Identify routine small-dollar tail spend (maverick spending) that requires less oversight by procurement and purchasing.
Some procurement systems or add-on software include thousands of pre-vetted vendors for buying office supplies and other low-cost items without needing a purchase order. Separating tail spend and using an integrated software system to purchase and manage it can reduce costs.
Effectively Managing the Use of Cash
A significant spend management challenge is effectively managing cash by reducing expenditure costs. Companies can cut costs and cash outflows using analytics and spend management insights.
The procurement team can contribute significantly to company results and impress the CFO, who’s ultimately responsible for cash management and profitability. You’ll contribute to good supplier relationship management when suppliers are paid timely in a reasonable source-to-pay cycle.
Business growth, even if profitable, can be a cash user because the company needs to invest more in:
- Inventory before sales are turned into cash by collecting accounts receivable
- Hires to support the growth
- Startup expenses for new opportunities
When revenue streams are reduced, cutting back on non-essential spending can mean the difference between a going concern and a bankrupt company.
Running low on cash means being unable to pay bills in your accounts payable aging on time (or ever). It may be impossible to get new inventory shipments from suppliers on credit, and vendors may require COD payments. COD terms reduce the procure to pay cycle to zero days.
Examples of Spend Management
Examples of spend management include:
- Providing maverick spend management programs
- Using the best spend management software
Maverick Spend Management
Your company may decide to use programs to manage maverick spending on small purchases. Maverick spend management is too costly for issuing purchase orders through the procurement department.
The program for managing this tail spend may include issuing Procurement cards (P-cards) to employees for these routine purchases. The P-cards require a monthly payment-in-full (unlike business credit cards which may allow later balance payment).
To handle tail spend, your business may use specialized software that provides the ability to buy from vetted suppliers for small, routine purchases like office supplies.
Spend Management Software
Automation software efficiently gives you more visibility by spending category and supplier and reduces business risk, helping your business reach its spend management goals.
The best software for business spend management automates sourcing and procurement workflows and gives you granular real-time visibility by category and vendor.
Spend management software for AP automation provides:
- Financial controls throughout the payables automation and global payments process
- Efficiency by reducing time-consuming tasks of manual processes
- Global regulatory and tax compliance
Examples of spend management solutions specializing in procurement include SAP Ariba, SAP Concur, Coupa, and Tipalti Approve.
Tipalti AP automation and global payments software helps your company achieve real-time spend visibility and control for these business processes, including 2-way or 3-way purchase order matching and built-in fraud and error screening.
Risks of Poor Spend Management
Risks of poor spend management include disorganization, increased costs, and poor supply chain management. Your company can mitigate these risks with better procurement management and spend management.
Disorganization
Without an ongoing effort to maintain clean data, orderly payment records, and oversee expenses, it’s easy for things to get out of hand. Managing spending takes time and effort. Unfortunately, companies that are more focused on revenue growth often make spend management a lesser priority,
Increased Costs
This is a byproduct of disorganization. Without an established system for monitoring expenses, it’s easy for inefficiencies to go unnoticed. Strategic sourcing, contract management, and other cost-cutting efforts are ignored or simply not feasible.
Poor Supply Chain Management
As companies expand, their product lines, service offerings, inventory management, supplier management, and supplier relationships become increasingly complex. Without real-time data and adequate spend visibility, organizations are exposed to breakdowns.
Subsequently, missed payments and delayed fulfillment are more common, damaging relationships with suppliers and customers.
A September 22, 2022 CNBC article highlights Bed Bath and Beyond’s retail troubles with its suppliers, including “strained relationships” and merchandise shortages from shipment reductions or cut-offs relating to its deteriorating customer risk profile. The article states:
“Over the past two years, however, Bed Bath [and Beyond] has tested vendor relationships by making late payments, pushing aggressively into private labels and losing shoppers…The terms can change, however, if a retailer shows signs of distress—sometimes pushing a vendor to shorten the payment window, require cash on delivery or halt shipments.”
Spend Management FAQs
What is the difference between spend management and budgeting?
Spend management and budgeting are different. Spend management is setting procurement cost reduction strategy and implementing processes, using automated spend management software enhanced by AI technology. Budgeting is a company-wide control process to establish spending limits for expenses and capital expenditures by department or cost center for each month of the year.
Budgeting is controlled through variance analysis which compares budgeted and actual amounts in the financial statements. Finance team analysts determine and explain the reasons for differences in budgeted vs actual expense amounts.
What is the difference between spend management and expense management?
Spend management considers all types of business expenditures, including expenses, inventory purchases, and equipment. The goal is to reduce the costs of procured items. Expense management is a control system that includes company policies, software for tracking employee expenses, handling expense report reimbursement, and tail spend management of routine, low-cost purchases.
Importance of Spend Management
Spend management is important because it prevents unnecessary spending, maintains data accuracy and organization throughout the entire billing lifecycle, and manages supplier relationships. Effective spend management enhances business profitability, reduces cash leakage, and minimizes supplier risk. It lets you see where cost savings are possible and makes your company more competitive, rewarding stakeholders.
